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Your credit score is a critical part of your financial record. It determines whether or not you’re qualified for an auto loan, will be pre-approved for a credit card, and how much you’ll be eligible to borrow for a mortgage. It can even influence your career and determine where you live. With so many different facets of life dependent on your credit score, it’s important to understand what it is, where it comes from, and how you can continue to build your credit to increase your score over time.

What Is It?

A credit score is a number between 300 and 850 that lenders use to decide how likely you are to repay debt and how well you manage your finances. Your base score is created by FICO, which uses information about your financial history from the three major credit bureaus— Experian, Equifax and TransUnion. Though each lender will have different definitions of what a “good” and “bad” credit score is, generally a score above 700 is considered very good, while anything below 579 is considered to be poor. Don’t worry about attaining a perfect score though— FICO reports that only 1.4% of Americans have ever achieved a score of 850.

What Affects It?

A variety of factors (known as the “FICO Formula”) are taken into account and are responsible for affecting your score:

• Payment history
  • Your payment history makes up the largest portion of your score at 35%. Whether or not you make timely payments on your loans and other lines of credit determines whether your score rises or falls.

• Credit utilization rate
  • Credit utilization rate makes up the second largest portion of your score at 30%. Credit utilization rate is the percent of available credit that you’re currently using. For example, if the balance on your credit card is $200 and your credit limit is $1,000, your credit utilization rate is 20%. Keeping your credit utilization rate at 30% or less indicates to lenders that you manage your credit responsibly and don’t overspend.

• Length of credit history
  • While this can automatically put younger people at a disadvantage, the length of time you’ve been using credit accounts for 15% of your score. The longer you’ve been using credit, the higher your score will be.

• New credit
  • Adding a new line of credit to your lineup can affect up to 10% of your credit score. When you apply for a loan or other line of credit, a hard credit inquiry could temporarily lower your score by several points, though this isn’t a reason for concern, as it will go back up over time.

• Mix of credit 
  • Finally, the last 10% of your credit score is affected by how many different types of credit you have. This includes credit cards, car loans, student loans, and mortgages. The more types of credit you have, the higher your score will be.

What Hurts It?

You’ve likely heard the phrase “just because you can doesn’t mean you should.” While there are many things you can do to raise your credit score, similarly, there are also many things you can do that will lower it, even if you don’t realize it.

Making late payments might be one of the biggest offenses when it comes to your credit score. If your payments are more than thirty days late, credit card issuers will notify credit-reporting agencies, which will lower your score. Even worse, missing payments altogether can lower it even more.

If you have a credit card with a zero balance, hang on to it— while cancelling a credit card you no longer use seems like the responsible thing to do, it reduces your total credit amount and shortens the age of your credit history, both of which will have a negative impact on your score. Conversely, a maxed out credit card raises your credit utilization rate, which can also hurt your score.

Applying for more credit won’t necessarily hurt your score, but be careful— applying for too many lines of credit in a short amount of time can look suspicious to lenders, while hard credit inquiries made during this time will lower your score, even if you aren’t approved for the line of credit you’re applying for.

How Can I Improve My Score?

Whether you already have a great score or you’re trying to improve a not-so-great one, building your credit and maintaining or raising your score will benefit you in the long run. Ensuring that you pay your bills on time will do wonders— signing up for autopay can help you stay on track to making payments on time. Additionally, paying off your current debts and avoiding future ones will lower your credit utilization rate, thus improving your score. 

If you want help managing your debt, improving your credit score, or understanding your credit report, our friendly and knowledgeable member representatives are here to help. Stop into your local Valley branch to learn how you can start building your credit score today!